The ancient alchemist and modern Wall Street capitalist have much in
common. The latter has achieved the modern equivalent of the alchemist's dream of turning cheap metals into gold. He creates money out of
absolutely nothing and wholly free from exertion or the inconvenience
of producing anything of real value.

Making money with no effort can be an addictive experience. I recall
my excitement back in the mid-1960s, when Fran, my wife, and I first
made a modest investment in a mutual fund and watched our savings grow
magically by hundreds and then thousands of dollars with no effort
whatsoever on our part. We got a case of Wall Street fever on what, by
current standards, was a tiny scale.

If you have difficulty understanding "economist speak,"
it may be because you are in touch with reality.

Of course, most of what we call magic is illusion. When the credit
collapse pulled back the curtain to expose Wall Street’s secret inner
workings, we learned the extent to which Wall Street is a world of
deception, misrepresentation, and insider dealing on a breathtaking
scale. It was such an ugly picture that Wall Street’s seriously
corrupted institutions stopped lending even to each other for the
simple reason that no one trusted the other guy’s financial statements.

Much of what Wall Street celebrates as financial innovation involves
borrowing to inflate the value of financial assets to create collateral
to support more borrowing to further inflate the assets to create more
collateral… Whether you call it a loan pyramid or a Ponzi scheme, it is a form of
theft.

A responsible Federal Reserve would have raised interest rates to
dampen asset bubbles like the tech-stock bubble of the 1990s and
housing bubble of the 2000s. Instead, captive to Wall Street interests, it
pursued cheap money policies to encourage and facilitate ever more
borrowing by speculators to keep the bubbles growing.

Academics who never learned the difference between real wealth and
phantom financial wealth published scholarly articles celebrating the
discovery of the secret of effortless wealth creation. Back in 1997, I
came across an article in Foreign Policy by John Edmunds, then a
finance professor at Babson College and the Arthur D. Little School of
Management, titled “Securities: The New Wealth Machine” [pdf]. This is a defining quote:

Historically, manufacturing, exporting and direct investment
produced prosperity through income creation. Wealth was created when a
portion of income was diverted from consumption into investment in
buildings, machinery and technological change. Societies accumulated
wealth slowly over generations. Now many societies, and indeed the
entire world, have learned how to create wealth directly. The new
approach requires that a state find ways to increase the market value
of its stock of productive assets. [Emphasis in the original.] … An
economic policy that aims to achieve growth by wealth creation
therefore does not attempt to increase the production of goods and
services, except as a secondary objective.

The thesis was so absurd that on first reading I thought it must
surely be some sort of joke or parody intended to expose the
irrationality of the exuberance surrounding the inflation of financial
bubbles. In his 2008 book, Bad Money, the journalist and former
Republican Party political strategist Kevin Phillips notes the Edmunds
article was widely discussed on Wall Street and implies that it may
have inspired the securitization of housing mortgages.

Contrary to the Edmunds “logic,” an asset bubble—real estate or
otherwise—does not create wealth. A rise in the market price of a
house from $200,000 to $400,000 does not make it more functional or
comfortable. The real consequence of a real estate bubble is to
increase the financial power of those who own property relative to
those who do not. Wall Street encouraged homeowners to monetize their
market gains with mortgages they lacked the means to repay except by
further borrowing. It then converted these toxic mortgages into
worthless toxic securities and sold them to the unwary, including the
pension funds that many of those who borrowed against their inflated
home values counted on for their retirement.

Why do we tolerate Wall Street’s reckless excess and abuse of power?
In part, it is because so many people of influence have bought into the
Edmunds fallacy. If you have difficulty understanding "economist speak,"
it may be because you are in touch with reality.